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EC rejects using free ETS new entrant reserve credits for CCS

The EU Parliament's proposal to give large-scale carbon capture and storage (CCS) demonstration projects up to 500 million free EU Emissions Trading Scheme (ETS) carbon allowances from the program's new entrant reserve from 2013 does not have enough support from EU governments to be accepted, the European Commission said in an informal opinion paper obtained by Platts November 12.

The EC, EU Council of Ministers and the EU Parliament all have to agree on common texts for proposals to become law.

"At present, only the UK and the Netherlands have expressed support for the technology-specific amendment adopted in the [Parliament]," the EC said in the paper.

The EC says it can only support CCS financing options that would have broad support from EU governments and would make reaching an agreement on its wider package of EU climate protection proposals in December more likely.

The EC, EU Council of Ministers and the EU Parliament all have to agree on common texts for proposals to become law.

EU Energy Commissioner Andris Piebalgs set out the EC's criteria November 10 for using the ETS to support demonstrating low-carbon technologies such as CCS in a speech to the general assembly of the European technology platform for zero emission fossil fuel power plants.

These criteria include that any such measures should be temporary, minimize any distortion of the ETS, respect EU state aid rules and guarantee an optimized portfolio of demonstration projects. (See: EU industry recommends selection criteria for CCS projects.)

All EU Allowances must come from within the overall ETS cap, and should not be awarded directly to investors in order to avoid windfall profits, Piebalgs said.

Any earmarking of EUAs for early demonstration projects must be technology neutral and must not be the only support mechanism; that is, it must leverage other financing, Piebalgs said.

The EC elaborated in the paper that the EU Parliament's proposed 500 million EUAs represent around two-thirds of the new entrant reserve in Phase III of the EU ETS from 2013 to 2020, "which is of concern," the paper said.

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The EC said in the paper that 500 million EUAs would be worth an estimated %8364;15 billion ($18.8 billion) over the eight years at an assumed EUA price of %8364;30.00 per metric ton, according to the paper.

That would cover the full estimated %8364;14 billion incremental costs over 10 years of the CCS demonstration projects.

"Full incremental costs is against the principle of leverage funding, and against the European Council [of Ministers'] request for a mechanism to stimulate, not replace, government and industry finance," the paper said. "There are also indications that the scale of the requested financing is a factor in the opposition of other EU governments."

The paper also said that "a sizable reduction in the number of [EUAs] to be earmarked for CCS is likely to be an essential prerequisite for any agreement on financing."

It suggests requiring such ETS financing be matched by national governments together with "substantial private sector investment."

The paper said that the EC is also working closely with the European Investment Bank on another, formal policy paper on how the EU could and should finance developing low-carbon technologies in general.

The EC/European Investment Bank joint paper is set for release in early 2009.

Next page: EU industry recommends selection criteria for CCS projects

Created: November 14, 2008

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